Economic Uncertainty Looms: Recession Fears and Market Volatility on the Horizon

There Are Many Signs A Recession Is Coming

The S&P 500 Index recently hit a new all-time high, and it is easy to be bullish now, but I think it makes sense to take some profits after a very significant rally in recent months. I see a number of potential headwinds coming towards the market and July is historically a positive month, which means it could make sense to take some chips off the table this month. After July, we will be rapidly approaching a seasonally less favorable time of the year for stocks, such as September and October. Aside from these seasonal issues, we have the U.S. Presidential elections coming up, which could add volatility toward the end of the year. But these might all be relatively smaller issues when compared to my concerns about a recession coming. While the market is now near all-time highs, and many investors are excited about the potential for rate cuts starting in September, I am not so bullish. First, I think the market has already priced in the expectations for the Federal Reserve to cut rates in September. If I am right, this could create a "sell on the news" event, whereby the stock market actually drops after the Fed cuts rates, potentially in September. When I look at the chart of the SPY, it looks over-extended and toppy to me, which is another reason why I am raising cash levels and being tactical about any new stock purchases. There are two ways to view the rate cuts: The bullish view is that rate cuts are going to happen soon because the Fed has conquered inflation and rate cuts will take some pressure off the consumer and a number of interest rate sensitive industries, such as real estate. I can appreciate that bullish view, and it could happen, in particular, if the Fed successfully pulls off the desired "soft-landing". However, I am concerned about the bearish view, which is that the Fed has already waited too long to cut rates and that the lag time of all these past rate hikes are finally going to catch up with the consumer and the economy as a whole and lead us to a recession. It was not that long ago when the Federal Reserve was telling us that inflation was "transitory". There were many signs that the very low interest rates created by the Fed were fueling rampant speculation in stocks, Bitcoin, real estate, and other assets. It was obvious that huge overbidding wars in real estate were pushing up housing costs, and food costs were surging at that time as well. By the time the Fed admitted that inflation was not transitory, the genie was already out of the bottle and the Fed had to play catch-up to combat inflation by raising rates very aggressively. Just as there was a significant lag time for the full inflationary impact of the Fed's extremely low interest rate policy to be felt by the economy, I believe there is an equally long and powerful lag time for the full impact of the Fed's unprecedented interest rate hikes to be felt. I see too many warning signs that the Fed's aggressive "catch-up" rate hikes and its apparent belief in a higher for longer interest rate policy, is already creating issues that will not easily be reversed with a simple rate cut later this year. I believe that the Fed is repeating the same patterns now as it did when it waited so long to hike rates in order to combat what were obviously rising inflationary pressures. Furthermore, I think the Fed has waited too long again-in this case by not lowering rates already, and I believe by the time it does wholeheartedly decide to cut rates, we could be in a recession. I see too many warning signals right now of a potential recession, and I believe that the lag effect of the high rates has not been fully felt yet. By the time the Fed potentially cuts rates later this year, I believe the market could start to acknowledge that the Fed is not cutting rates simply because inflation has dropped, but because the U.S. consumer and the economy have cracked and tipped into a recession. Again, I want to stress the importance of the lag effect in this rate hiking cycle, in particular, because this was the second-quickest tightening cycle in recent history. Because of the speed of this monetary tightening, I believe the economy has not felt the full impact yet. However, I believe that it will soon, and only after it is already too late to create a soft landing. The Fed says it is "data dependent" and I believe therein lies the problem because by the time the data shows that the Fed's inflation goals have been met, it will likely be too late due to the lag effect. I believe the Fed needed to anticipate inflation before it got out of hand, and I also now believe the Fed needs to anticipate the increasing odds of a recession before it happens. Desmond Lachman of the American Enterprise Institute has published a very interesting article titled "The Fed Keeps Making The Same Mistakes", which details the impact of the policy errors that the Federal Reserve has made throughout the years as well as the risks he sees now from the current higher for longer interest rate policy. The article states: "Once again, the Fed seems to be ignoring - at its own peril - the dramatic recent swing in money supply growth from one of excessive expansion to one of contraction. Whereas in 2021 the broad money supply surged by over 10 percent, today it's actually declining at its fastest since the 2008-2009 Great Economic Recession. This should be raising red flags that the Fed is now engaging in monetary policy overkill to regain inflation control. That could bring on an unnecessary recession. With its past poor monetary policy record that led to multi-decade inflation, one might have hoped for a humbler and nimbler Fed. Instead, we have a Fed that keeps insisting that it might need to raise interest rates further and keep them high until at least 2024 to get inflation under control. It does so even when there are signs that the economy is slowing and inflation is moderating. For this reason, we might need to brace ourselves for a hard economic landing." While the market has rallied in recent months, based in part on the hopes of a Fed pivot on interest rates, the fact is that the market historically often drops after the first rate cuts. I want to point to a very interesting article by Meeder Investments which shows that historically, the market often experiences a large decline after the first rate cuts, and that the Fed often misses the mark in terms of job market losses that tend to come right around or soon after the first Fed rate cuts. If history repeats and the Fed underestimates unemployment by 2.5%, we could be seeing unemployment hit 7%, instead of the Fed's forecast of about 4.5%. The article states: "Many investors believe the stock market will perform well after the Fed starts cutting interest rates. History tells us this is not necessarily true. Since 1970, more than half of the Fed's first cuts were followed by declines of more than -20% by the S&P 500 Index. Soft landings are easier said than done. Historically during recessions, the Fed underestimates the increase in unemployment by 2.5%." The consumer is a huge driver of the U.S. economy. Recent data suggests that consumer spending accounts for nearly 70% of the gross domestic product, or "GDP" in the United States. That means that if the consumer is starting to crack, the U.S. economy could be next. There are already major warning signs that the economy is slowing down. Some consumers are under significant pressure now and this can be seen by looking at the increased delinquencies with auto loans as well as record high levels of credit card debt. What's notable to me is that a large number of consumers appear to be cracking now and that is happening when unemployment levels are relatively low at 4.1%; but as shown below, it has been increasing. If it goes beyond the levels projected by the Fed, we could see bigger cutbacks in consumer spending. I have been watching a number of economically sensitive and consumer spending-sensitive stocks, and I feel there are too many signals from these types of stocks that a potential recession is coming. Starbucks Corporation (SBUX) recently warned that consumers seem to be feeling the pinch, and its stock has been under pressure this year. Other consumer discretionary stocks have also been declining, even as the market hits new highs, much of which has been fueled by AI and mega-cap tech stock gains. Some of the stocks I have been watching as examples include Polaris Inc. (PII), Whirlpool Corporation (WHR), and more. These stocks cover a wide range of industries and they are all experiencing declines. When I look at the charts below, it shows me a level of economic weakness that could be a major sign of an impending recession. Even the high-end consumer appears to be cutting back, as LVMH Moët Hennessy - Louis Vuitton, Société Européenne (OTCPK:LVMUY) recently reported weaker than expected results, and this stock is now trading near 52-week lows. I could be wrong if the Fed is not too late with rate cuts, and there still is potential for the Fed to cut rates and create a soft landing. There is a chance that if the Fed cuts rates in September, it will boost consumer sentiment and spending enough to get the economy growing at a higher rate. This could take the recession scenario off the table. There is another unprecedented factor that I see as potentially mitigating any policy errors that the Federal Reserve might be making, and that is AI. I believe that it is possible that a boom in AI could create enough growth and positive sentiment to offset some or all of the slowdown that we appear to be seeing in the economy. The Fed has made policy errors in the past, and history shows that contrary to what many investors seem to be expecting, the first Fed rate cuts are often followed by a market correction. The Fed has also historically underestimated peak unemployment rates that occur with some lag time, after a major monetary tightening cycle, as we have just experienced. We are getting into a seasonally less favorable time of year for stocks, and the upcoming election might also cause volatility. There are many stocks that have been very weak this year and could be signaling that a recession is coming. With the S&P 500 Index and many other market averages appearing overextended now after a big rally, this could be an ideal time to raise cash. This is what I have been doing, and if the market declines after the first rate cuts or for other reasons, I will be in a position to deploy that cash when potentially better buying opportunities arise. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.

The Next President Will Likely Inherit A Major Recession And Stock Bear Market

Federal Reserve monetary policy, rather than Presidential economic policies, is a key driver of the boom-bust business cycle, with indicators pointing towards a potential recession. In this article, I will present evidence that shows it is highly likely the next US President will inherit a major recession and stock bear market. This is likely to dominate the early years of their administration, which will lower his or her popularity and make it difficult to implement their agenda. In addition to being interesting, I hope this information will help investors who want to prosper during the challenging times ahead. Betting Markets Currently Favor Trump According to the table below from Real Clear Politics, betting markets are predicting Trump will likely win the Presidency with 58% odds. Harris is second with 33% odds, and Michelle Obama is a distant third with only 3% odds. Whoever wins the election will likely have a challenging time in their early years if there is a recession and bear market, particularly with the country already highly divided politically. Presidential Economic Policies Are Not Likely To Prevent Recession It is unlikely that the next President will have any major influence on the likelihood of a recession and bear market. If Trump is elected, he may try to implement higher tariffs, trade restrictions and tougher immigration policies while trying to offset the negative impact of these policies on the economy by reducing regulations and lowering income taxes. Unfortunately, high-budget deficits and the huge government debt problem will likely persist, since neither party has a plan to restructure major entitlement programs like Social Security or Medicare, which is the key driver of long-term debt and deficits. Federal Reserve Monetary Policy Drives Boom-Bust Business Cycle Unlike Presidential fiscal policies, I believe Federal Reserve monetary policy is the key driver of the boom-bust business cycle. That is why Wall Street hangs on every word said by Fed Chair Jay Powell and his central planning colleagues. According to Austrian Business Cycle Theory, developed a century ago by Austrian economists Ludwig von Mises and F.A. Hayek, unsustainable economic booms are caused by central and commercial banks creating new money out of thin air. The inevitable busts occur when they slow money supply growth or, even worse, contract it. In response to the covid panic of 2020, the Fed created 40% more US dollars. That led to the highest inflation rates since the early 1980s. That high "transitory" inflation forced the Fed to raise the Federal Funds interest rate by over five percentage points over the past couple of years, which is the biggest increase in over 40 years. Every time there has been a large increase in rates by the Fed, there has been a recession. One of the Fed's preferred inflation measures is "SuperCore CPI", which is services inflation less shelter. SuperCore CPI rose 4.8% in June, which is 2.4 times higher than the Fed's 2% target. This suggests the Fed should not be cutting rates anytime soon if they are serious about fighting the inflation they created, but I believe they will as unemployment rises and a recession becomes obvious. For those investors who believe the Fed can prevent a recession with rate cuts at this point, I remind them that the Fed slashed rates all throughout the early 2000s and 2008-2009 recessions, but that failed to prevent them or their related stock bear markets. The chart below shows the Federal Funds rate going back 70 years. It indicates that recessions (shaded gray) began after significant Fed rate hikes, including in the early 2000s, 2008-2009 and 2020. It also shows that the Fed has held rates at a similar level and for a similar year-long period as they did before the Great Recession. This is not a bullish chart for the economy. Yield Curve Inversion Always Precedes Recessions Due to the Fed rate hikes, short-term rates are higher than long-term rates, which is called an "inverted yield curve". Every time the yield curve has been this inverted in the past 100 years, there has been a major recession. That includes the Great Depression of the 1930s. The 10-Year/1-Year Treasury yield curve has been inverted for the past two years, as shown in the chart below. That is longer than the 18 months of yield curve inversion before the Great Recession of 2008-2009. Historically, the longer the yield curve inversion, the longer the subsequent recession. Money Supply Has Been Declining Due to the Fed's tight monetary policies, the Fed's Monetary Base (currency plus bank reserves) has declined 11% since December 2021, as this chart shows. The popular M2 money supply has declined 3.5% since March 2022. I believe a better money supply measure is one that does not double count and includes money that can be immediately spent. Based on the work of economist Murray N. Rothbard, this can be defined as M2 less small time deposits less retail money market funds plus Treasury Deposits with Federal Reserve Banks. This measure is down 12.7% since May 2022, as shown here. That is the biggest decline since the Great Depression. Housing Demand Is In Recession Housing demand is very sensitive to interest rates, which makes it an excellent leading economic indicator. Due to mortgage rates more than doubling over the past few years and very high home prices relative to incomes, buying conditions for homes are near the worst levels in history and housing demand is very weak. As a result, the NAHB Housing Market Index (blue line in the chart below) has fallen to a level typically seen during recessions. In addition, housing starts (red line) are down 4.4% year-over-year. Manufacturing And PMIs Are In Recession Manufacturing is also a proven leading economic indicator. As shown below, manufacturers' new orders (ex-defense and aircraft) are declining -0.3% year-over-year. That is not an inspiring sign for the economy. The composite of the ISM manufacturing and services purchasing manager indexes ("PMIs") is below 51, which typically only occurs in a recession, as shown below. Real Retail Sales Are Declining Declining real retail sales are a typical recession sign. In June, real retail sales fell 0.7%. As the following chart shows, real retail sales have been flattish or declining for more than two years. Imagine how much real retail sales can decline when unemployment starts rising significantly, as it typically does about two years after the yield curve inverts. Unemployment Is Rising At A Recessionary Pace Speaking of unemployment, there are numerous signs it is getting worse. One sign is temporary job losses, which are a leading employment indicator since temporary workers are the easiest type of employee to layoff. Temporary job losses have totaled 515,000 since March 2022 and are falling at a rate only seen in recessions. That is also true of other leading employment indicators such as job openings, quits and hires. Another sign of a recession is declining full-time jobs. While part-job jobs have increased, a whopping 1.6 million full-time jobs have been lost over the past year. As this chart shows, full-time jobs are falling at a pace only seen around recessions. Historically, a recession has always occurred when the four-week moving average of continuing unemployment insurance claims rose 20% or more. So far, they have increased 37% from their lows in June 2022, as shown here. Another sign of a recessionary jobs market is the combined ISM manufacturing and services Employment Composite has been below the neutral 50 level for months, as shown here. Perhaps the simplest and most useful employment indicator is the unemployment rate. Historically, whenever it has risen at least 0.5% from its lows, there has been a recession. So far, it has increased 0.7% from its low of 3.4% in 2023 to 4.1% now. Leading Economic Index Is Declining At A Recessionary Pace The Conference Board's Leading Economic Index is a composite of 10 proven leading economic indicators. As the chart below shows, it is declining -5% year-over-year. That is similar to the declines seen at the beginning of recent recessions. Stock Market Valuation Is At All-Time High What does a recession mean for the stock market, when we're at the beginning of the "AI revolution"? Remember when Internet mania drove the stock market to such high valuations in 2000 that the NASDAQ ended up collapsing about 80% during the relatively brief and mild recession of the early 2000s? The stock market always falls into a bear market during a recession. The higher the starting valuation, the deeper the bear market that usually follows. As this chart from economist and fund manager John Hussman shows, the stock market is now at the highest valuation level in history...even higher than the valuations seen at the Tech Bubble peak of 2000 or even the 1929 peak. This stock market valuation ratio (which is similar to Warren Buffett's preferred valuation ratio: total stock market capitalization to GDP) has a century of accurately forecasting long-term (12-year) returns for the S&P 500 better than any other valuation metric. Based on this all-time high valuation level, the S&P 500 is likely be at least 50% lower in 12 years. What Can Investors Do? With a new President likely to inherit a recession and bear market, what can an informed investor do? The easiest strategy is to identify when the bear market is likely starting based on technical indicators and simply invest in Treasury bills or a money market fund and earn 5% interest risk-free. I believe they can also consider investing in gold and silver. I recently argued that gold and silver are in a bull market uptrend that is likely to continue for a while. For those investors willing to take on more risk in the goal of seeking higher returns during a bear market, they can buy inverse ETFs that rise in price when stocks fall, such as SH or PSQ. I wish you the best of luck in navigating the challenging times ahead. Please let me know your thoughts in the comments below, so we can all continue learning from each other. I have over 30 years of investment industry experience, including over 22 years as a stock analyst at Allianz Global Investors. I write about generating high returns in any market environment using technical and fundamental analysis. 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Mag 7 Stocks Should See One More High

Looking for more investing ideas like this one? Get them exclusively at Tech Insider Network. Learn More " The market is currently pricing in up to three rate cuts this year, which is putting pressure on Magnificent 7 stocks, defined as Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia and Tesla. Due to their global exposure, heavy cash positions and positioning within the growing AI trend, they have been perfectly situated to benefit from a bifurcated and complex macro environment. Because of this, the Mag 7 has significantly outperformed the broad market, and also led it higher for nearly 2 years. To put this into perspective, the first six months in 2023 was the biggest 6-month rally in Nasdaq history - and since then, over a year ago now, the NASDAQ has plowed through key levels to reach a staggering 72% return in a little over 21 months. It's not only the returns we've seen in 2023 and 2024 that are unusual, but the fact it happened back-to-back. Tech investors can thank the Mag 7 for this spectacular outperformance. However, we are now getting evidence that a change is happening. As excitement over reduced rates has investors rotating into beaten down small caps and consumer-facing stocks that have sat out tech's historic rally. By not participating, small caps and other pockets in tech that are more traditionally cash-strapped are now undervalued. Optimism around the Fed could spark a continuation of the relief rally in the Russell 2000 and further rotation out of the Mag 7. Below, we look at the pros and cons of a Mag 7 rotation and how we plan to personally handle this shifting landscape. The complexity of this business cycle can't be overstated. On the one hand, we are seeing one of the longest and steepest yield curve inversions in market history. This signal has a near perfect track record of predicting recession, which is being backed up by a weakening consumer, and a deep and prolonged manufacturing recession that is now filtering into the services sector. On the other hand, corporate profits are healthy, the job market remains relatively tight, and AI is creating a new economy that is driving historic top line and bottom-line growth for the AI leader (we think there will be many more beneficiaries beyond Nvidia). This bifurcation within the economy can be seen in equity markets. For example, markets that are dependent on a strong consumer, thrive with lower interest rates, or in need of cheap money to expand - like high beta tech, small caps, real estate, consumer discretionary - are still well below their 2021-2022 highs. At the same time, we are seeing markets that have global exposure, flush with cash and are not dependent on the consumer, all well above their 2021-2022 highs. This is most obvious with the Mag 7, who were leading this market higher in early 2023, and continuing into today. For this reason, we need to take a closer look at select charts within the Mag 7 to get an idea on where the market is going over the short term, as well as the medium to long-term. Our broad market analysis in 2024 has been focused on the relative performance of the Mag 7. Unquestionably, these 7 stocks are the most important stocks in the current bull market. Historically, as long as the cycle leaders continue to move higher with the market, all is well. However, as stated in our March Report. When the cycle leaders start to underperform, it tends to mark the start of a trend change. The Magnificent 7 have been the undoubted leaders of this bull run, and we are now seeing them start to trend lower against the indexes. More times than not, the leaders on the way up, tend to be the leaders on the way down." This was the pattern that warned us about the April selloff, and again in July. What followed our March report was a 6.3% drop in the broad market. However, high-fliers like NVDA and META dropped 22%, TSLA dropped an additional 32% while the rest of the Mag 7 dropped between 15% - 10%. Since then, the market has recovered and resumed the bull market higher; however, we have seen new leadership emerge from the Mag 7. Since the April 19th low, the S&P 500 is up +12%, while Apple is up 32%, Nvidia is up 64% and Tesla is up 77%. What is interesting is that the same pattern that we saw from the Mag 7 in early March, was also warning investors leading into the July 16th high. Nvidia first started making lower highs on June 10th, followed by Tesla on July 10th, and then finally Apple on July 15th. So, while the broad market continued to make higher highs, it was doing so without its leaders, signaling that trouble is likely ahead. The divergence above within the Mag 7 stocks warned us of the coming volatility. We can use further analysis of these important stocks to help tell us what the market may do next. Of the Mag 7 charts, Apple, Microsoft, Nvidia, Amazon and Google are the clearest. They all suggest that what we are seeing is a correction within a larger uptrend, and that it is likely that we see higher levels in the coming weeks. While Meta and Tesla can be interpreted in the same way, they are not as clear as the ones we will discuss below. For reference, the 5 stocks below account for ~28% of the S&P 500, and should have a very strong correlation to the direction of the broad market over the coming weeks to months. Nvidia is the most important stock in the current bull market. Within the most recent bull market, it has gone from a top 25 stock in the S&P 500 to now the 2nd most valuable company in the U.S. due to its positioning within the new AI trend. Our firm was the first to lay out NVDA's path to becoming the most valuable company in the world. Now that it has surpassed Apple, we further presented how it has a clear path to becoming a $10 Trillion Company by 2030. Since the 2022 low, NVDA has been tracing out a very large 5 wave pattern higher. Note the vertical move higher in early 2024. This was met with max volume and max momentum to the upside. This is the marker that you are in the most powerful moment of a trend, which is the 3rd wave. This is also around the halfway point of the entire 5 wave pattern. The pattern appears to be incomplete. Even though NVDA topped early, the drop is a clean 3 wave pattern within an incomplete uptrend. We still need a 5th wave to new highs in order to complete the larger 5 wave move. Nvidia may have one more drop into the $113 region before bottoming, but appears to be developing a bottom right now. Look at the momentum indicator below. It is bottoming in the exact same region the April low tagged, and it is doing so while the price is much higher. These are the type of bottoming signals we look for when de-germing a low is close within a developing uptrend. As long as any further drop holds $103, we expect NVDA to push higher. With Apple's push into bringing AI to the consumer, coupled with the likelihood that the Fed will lower rates soon, Apple has stopped becoming a laggard and is instead one of the leading Mag 7. It appears to be a bit further along in its uptrend pattern off the 2022 low. While NVDA needs a large degree 5th wave, Apple is missing a smaller degree 5th wave. Like NVDA, the pattern is incomplete while giving us clear bottoming signals. Note how the momentum indicator is making a lower low from the June low into today's low. This is happening while the price is making a higher low. This is the type of pattern we see in ongoing uptrends, and supports that we should see another swing higher into late summer/early fall. As long as Apple holds over $206, we expect to see this move higher manifest. Our firm recently closed MSFT for a sizable profit due to valuation concerns. While the chart does suggest it has one more swing higher, we see other stocks within tech having more upside in both valuations and technical targets. For this reason, we have rotated these gains into Nvidia, as well as other AI stocks that we have been targeting for months. However, like Apple and Nvidia, Microsoft is a bellwether for the broader market and an important stock to cover. It is very rare to see MSFT move against the market, and when it does, it is a sign of a brewing trend change. The below chart shows a very mature uptrend off the 2022 low. We have a very large 5 wave pattern that is suggesting it has one more swing left. This would be wave 5 of a larger 5th wave, and is estimated to be anywhere between 8 - 15%. We are seeing similar bottoming patterns in MSFT as we saw in AAPL. Microsoft appears to be completing what looks like a 4th wave drop. As long as any further weakness holds $406, I expect a final 5th wave push in the coming weeks. Amazon looks a lot like MSFT and AAPL. It is tracing out a 5 wave pattern and needs the final 5th wave higher to complete the uptrend. The current drop also appears to be a 4th wave and showing bottoming signals like the above charts. As long as AMZN can hold $174.50, we expect a 5th wave bounce in the coming weeks. Google is making a lower high while it is at extreme oversold conditions. Like the above charts, it looks like it needs one more high to complete the larger 5 wave pattern. As long as any additional weakness can hold $169, it looks like it needs a 5th wave bounce to complete the bigger uptrend. The broad market in the S&P 500 is signaling the same push higher that we are seeing in the above key stocks. While it appears that we have another move higher to look forward to, according to the larger pattern in play, the next move will likely be the final move we see before having to contend with, at best, a multi-month and deep correction. The pattern that the S&P 500 is tracing off the 2022 low is what is called an ending diagonal pattern. It is the only pattern that can account for the messy, overlapping moves that we have seen in both directions. The only question is what degree of a 5 wave pattern is in play, which is what my two counts represent. As long as any further weakness holds over 5375-5200, we should continue to see the bull market continue for another move higher. Below this level decrease the odds of this happening. The final support for any pattern that can take us higher would be 5,200. Below this level and the larger period of volatility will have likely begun. The June CPI numbers came in softer than expected. This, coupled with weakening economic data, triggered the market into a rotation based on the expectation that the FED will have to cut rates sooner rather than later. As a result, the Russell 2000 is up about 9% from that moment, while the Mag 7 are down an average of 13%. Furthermore, we are seeing an expansion of breadth into more consumer-based value stocks as well as some high beta names. As stated, it appears that the majority of the Mag 7 and the S&P 500 are supporting another push higher. This is also supported by small caps. The benchmark for small caps, the Russell 2000, for example, appears to be in a 4th wave correction, which is around the halfway point of the move higher. As long as any further weakness holds $211 (IWM), like the rest of the markets and stocks we covered, it should continue higher before putting in a more meaningful top. The broad Small-Cap Index is also suggesting that a low is being put in, and we should see another swing higher. The upside pattern is incomplete and likely around the halfway point of the move higher. However, we do still believe this is a stock pickers market, so we have positioned some of our portfolio into select small cap positions that have exposure to AI. While the rotation into small caps may continue, it looks like the bulk of this rotation is complete, as the broad market is setting up the next leg higher. Realized volatility (RV) is a measurement of price swings on a day-to-day basis. The lower the RV is, the smaller swings in either direction are to be expected. Ideally, you want to see RV trending lower as price moves higher. This tends to mark a healthy uptrend. The best way to think about Realized Volatility is as a measurement of liquidity entering or exiting the markets. The more liquidity there is, the smaller the moves we tend to see, as the market continues to grind higher. The higher Realized Volatility goes, the less liquidity is in the market - i.e., big money is raising cash, which can cause larger swings in the market. What matters to me is how Realized Volatility is trending with the market. This is what we are seeing today. Look at the 10-day, 20-day and 30-day measurements of Realized Volatility is trending up with price. The last time RV hit these levels that we last around the April low. This is significant, as it indicates that liquidity is leaving the markets while price is much higher. As long as Realized Volatility continues to trend higher with price, it is a warning that liquidity is exiting. However, this also means that less liquidity can propel the markets higher up to several months. Note the two most recent periods this happened - 2020 and 2022. Once we saw RV start trending higher with price in 2022, we only saw a 5% move higher over a 1.5-month period. However, in 2020, this trend lasted for +3 months and led to a 10% swing higher in the markets. In conclusion, the stage is set for a meaningful move higher, if we can see SPX break above 5670. While less liquidity tends to mark the early warning of trend reversals, it also means that any bullish catalyst can propel the markets higher in larger than normal daily swings. This lines up with what the majority of the Mag 7 is suggesting - a 5th wave rally to new highs is needed to complete the larger uptrend. As long as the supports listed hold, this is what we are expecting. While the next move higher could last anywhere from a few weeks to several months, it's important for investors who are buying the dip to realize the risks involved within the larger picture. While being nimble can pay off handsomely in moments like this, not having a risk management plan can do the opposite once the market rolls over.

SPX 500: Further Weakness May Trigger A Medium-Term Global Risk-Off Event

The S&P 500 is at risk of shaping a medium-term (multi-week) corrective decline phase which may trigger a global risk-off scenario. Originally published on July 25, 2024 By Kelvin Wong The mega-capitalization stocks have led Wednesday's rout in the US stock market (SPX, SP500) where the Magnificent 7 cohort (Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), Nvidia (NVDA), Tesla (TSLA), Alphabet (GOOG, GOOGL), and Meta (META)) shed close to -US$760 billion loss in their combined market capitalization in a single day on Wednesday, July 24, 2024. The Nasdaq 100 (NDX), which has the highest weightage of the "Magnificent 7" group of stocks among the major benchmark US stock indices, bled the most with a daily loss of -3.65%, its worst daily performance since October 7, 2022. This set of horrendous performance came after the bearish breakdown below its 19,520 key short-term pivotal support, as highlighted in our previous report reinforced by a disappointment in the Q2 earnings results of Tesla and Alphabet. The weakness inherent in the higher-beta Nasdaq 100 has triggered a negative feedback loop into the broader S&P 500 that shed 2.32%; its worst daily performance since 15 December 2022 after it notched 38 record closing highs this year and ended its best streak without a 2% decline since the Great Financial Crisis of 2007. The current month-to-date outperformers as of July 24, the Dow Jones Industrial Average (+1.88%) and Russell 2000 (+7.21%) that have benefitted from the bull steepening of the US Treasury yield curve (10-year minus 2-year), were not spared from Wednesday's mega-cap onslaught as both of them recorded daily losses of 1.25% and 2.13% respectively. Implied low correlation and volatility may trigger further sell-off Another interesting point to note is the recent plunge in the VIX (implied volatility of the S&P) to almost a six-year low of 11.92 on the week of May 20, 2024, which in turn has coincided with market participants' perceptions of future low correlation readings (higher dispersion of returns on the average) among the US S&P 500 index constituents. The Cboe 3-month Implied Correlation Index measures the 3-month expected correlation across the top 50 market capitalization-weighted S&P 500 constituents which have slipped to an all-time low reading of 7.80 on the week of July 8, 2024 as Artificial Intelligence optimism has led to outsized gains in the "Magnificent 7" excluding Tesla since the start of this year versus meagre gains seen from the other 494 component stocks of the S&P 500. The persistent trend of lower "lows" seen in the Cboe 3-month Implied Correlation Index in the past three months has helped to depress the VIX, which in turn created an artificial calm in the overall stock market that led to a higher degree of "complacent risk-on or seeking behaviour". The VIX hit a level of 11.92 on the week of May 20, 2024 - its lowest level since September 2018 - and continued to remain compressed below its 18-year average of 19.30 till the first two weeks of July 2024 (see Fig 1). Only in the recent two weeks, the VIX has seen a jump to 18.84 as of Wednesday, July 24. A similar pattern between the 3-month Implied Correlation Index and VIX occurred in January 2018 before "Volmageddon" erupted in early February 2018, where a period of stock market calm was shattered and funds that had crowded into volatility-selling strategies and exchange-traded funds were forced to exit that led an abrupt spike in the VIX, where it doubled in a single day on February 5, 2018, and in turn, triggered a global risk-off event that saw multi-month declines in other global stock indices. Hence, if the earnings results and or outlook disappoint in next week's earnings reports of the other Magnificent 7 stocks (Amazon, Apple, Microsoft, and Meta), the VIX may see a further spike which is likely to trigger a medium-term corrective decline sequence in S&P 500 and a spillover negative feedback loop into other global stock indices. S&P 500 at risk of breaking below its 50-day moving average Based on the current price actions of the US SPX 500 CFD Index (a proxy of the S&P 500 E-mini futures), it is now looking vulnerable for a breakdown below its 50-day moving average and the lower boundary of its medium-term ascending channel from the October 27, 2023 low. In addition, the medium-term momentum condition has turned bearish, as depicted by the latest reading on the daily RSI momentum indicator as it broke below the 50 level on Wednesday, July 24, and has not reached its oversold region yet. These observations suggest that the medium-term uptrend phase in place since the October 27, 2023 low has been damaged. A break below the intermediate support at 5,327 may reinforce a medium-term (multi-week) corrective decline phase to expose the next supports at 5,150 and 5,010 (also the 200-day moving average) in the first step (see Fig 2). On the other hand, a clearance above 5,680 key medium-term pivotal resistance reinstates the bullish impulsive upmove sequence to see the next medium-term resistance coming in at 5,830/920. Original Post Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.